Question

Universal Leasing leases electronic equipment to a variety of businesses. The company's primary service is providing alternate financing by acquiring equipment and leasing it to customers under long-term direct financing leases. Universal earns interest under these arrangements at a 10% annual rate.

The company leased an electronic typesetting machine it purchased for $30,900 to a local publisher, Desktop Inc., on December 31, 2015. The lease contract specified annual payments of $8,000 beginning January 1, 2016, the inception of the lease, and each December 31 through 2017 (three-year lease term). The publisher had the option to purchase the machine on December 30, 2018, the end of the lease term, for $12,000 when it was expected to have a residual value of $16,000.

Required:

Show how Universal calculated the $8,000 annual lease payments for this direct financing lease.

Prepare an amortization schedule that describes the pattern of interest revenue for Universal Leasing over the lease term.

Prepare an amortization schedule showing interest expense of Desktop Inc. over three year lease term.

Prepare the appropriate journal entries for Universal Leasing from the inception of the lease through the end of the lease term.

Prepare the appropriate journal entries for Desktop Inc. from the inception of the lease through the end of the lease term.

Answer 1

Calculation of annual lease payment as follows: Amount to be recovered Less: Present value (12000x0.7513) Amount to be recovered through lease payment Lease payment at the beginning of each year (21,884/2.7355) 30900 9016 21884 8000

Amortization schedule of interest revenue for Universal leasing: Interest Date Payment @10% Principal Balance 1-Jan 1-Jan 31-Dec 31-Dec 31-Dec 30900 8000 22900 5710 17190 628110909 8000 000 2290 000 1719 120001090.9 10909

Journal entries in Universal leasing: 1-Jan Lease receivable 30900 Machine 30900 1-Jan Cash 8000 Lease receivable 8000 31-Dec Cash 8000 Interest revenue 2290 5710 Lease receivable 31-Dec Cash 8000 1719 6281 Interest revenue Lease receivable 31-Dec Cash 12000 Interest revenue 1091 Lease receivable 10909

Answer 2